Tesla's Model S perfect for safety, but how about sales?

Aug. 26, 2013
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The Tesla Model S Signature model. / Tesla

by John Shinal, Special for USA TODAY

by John Shinal, Special for USA TODAY

SAN FRANCISCO - Investors have so far valued Tesla Motors like a technology company, rather than an automaker, based on its market capitalization.

Last week, the company showed how it was unlike any other automaker to come before it.

The company's Model S sedan earned a perfect score of five stars in every category of the crash safety tests conducted by the National Highway Traffic Safety Administration.

But acing those important tests - which are widely followed and routinely used in advertising by automakers whose cars score well - didn't make Tesla unique.

What did was the company's claim that it had managed to somehow earn a combined rating of more than five stars - even though the NHTSA has no such rating.

When Tesla issued a news release claiming that it had built the safest car ever tested by the agency, earning an "overall mark" of 5.4, the news was widely covered - so much so that the NHTSA felt the need to issue its own release, contesting Tesla's spin on the test results.

Clarence Ditlow, director of the Center for Auto Safety, was quoted by ABC News as saying of the Model S: "You can't say it's the safest car ever built, just that it had the best overall test score of any vehicle tested by the NHTSA."

To me, there seems to be a distinction with a relatively small difference.

It reminds me somewhat of the scene in the spoof documentary Spinal Tap, in which director Rob Reiner discusses with one of the fictional aging rockers why one of the knobs on the band's sound board goes to "11," rather than 10.

But absurdity aside, Tesla's spin garnered a large amount of positive publicity for the company among consumers.

It drove home the point that an electric car without a forward engine compartment has a so-called accident crumple zone that can keep its occupants as safe as any European sedan.

It also provided a reminder that Tesla is based in Silicon Valley, not Detroit, and that its pioneering technology has benefits beyond saving its buyers a lot of money on gas.

The company faces many challenges as it tries to transition from a niche automaker selling 20,000 cars a year (its own forecast for this year) into one that can sell half a million vehicles annually â?? which is the capacity of its factory in Fremont, Calif.

Among those are a dearth of electric charging stations and that an abundance of car dealerships - affiliates of auto giants such as Ford Motor, General Motors and Toyota - are hostile to Tesla's ambitions.

And oh, by the way, Tesla CEO Elon Musk earlier this month said the electric car battery industry will need to expand its capacity by the equivalent of all the power used today by the entire PC industry.

Yet the company followed up a rocky 2012, during which it missed its production forecasts more than once, with a banner 2013, in which its revenue growth has exploded and it produced operating cash flow of $26 million during the first half of the year, reversing a $128 million loss for that same metric in the same period in 2013.

For that achievement, Wall Street has bestowed upon the company a valuation of close to $20 billion, or 10 times its expected annual sales this year.

That's a higher price-to-sales ratio than Google, whose market cap of $290 billion values it at almost five times this year's expected revenue.

And it's far more expensive than Ford, which is valued at $65 billion, or a little less than half the value of the company's expected sales of $140 billion, while Toyota is valued at $200 billion, or roughly three-quarters of its expected year sales of $260 billion.

The base price of the Model S starts at around $64,000, which means it has no prayer of reaching a mass market.

But the company is already working on another model that Musk has said will sell for $35,000, a price point that could prove widely appealing.

An exceptionally large number of investors are betting against Musk, based on the number of company shares that are sold short - which is a bet that they will go down, not up, in the near future.

So far, the hedge funds and others who've sold Tesla short, literally, have lost their shirts, as the stock has risen more than five-fold during the last 12 months.

The company's valuation rising valuation has in turn led to yet more bearish bets against the company.

Yet if Musk can continue to turn Tesla's technology edge into benefits that auto buyers have traditionally valued â?? such as safety â?? the pain for Tesla shorts may only be beginning.

And that's regardless of what the NHTSA has to say about its own safety ratings on Tesla.

John Shinal has covered tech and financial markets for 15 years at Bloomberg, BusinessWeek, the San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others.